Down Payments Issued Without a Sworn Statement May Result in Owners and Lenders Paying More than Their Contract Price
In the construction industry, owners and lenders often issue "down payments" to contractors prior to the commencement of work on a project. This practice commonly occurs on residential construction and small commercial projects. Owners and lenders must ensure that such "down payments" fully comply with the Michigan Construction Lien Act (the "CLA"). The CLA generally protects owners from paying more than the total amount they agreed to pay the contractor – irrespective of subcontractors' and suppliers' liens. However, owners and lenders who issue "down payments" without obtaining a sworn statement will lose these CLA protections. Ultimately, the owner and lender may be liable for more than the total amount the owner agreed to pay the contractor.
In a recent Michigan case, Dubuc v. Copeland Paving, the owner hired a contractor to perform paving services. The owner issued a "down payment" to the contractor without first obtaining a sworn statement. After the contractor completed the project, the contractor's asphalt supplier recorded a lien. The lien amount, plus the amounts the owner already paid the contractor, exceeded the total amount the owner agreed to pay for the project. The owner attempted to rely upon one of the CLA's protections, which generally provides that liens shall not exceed the amount the owner agreed to pay the general contractor "less payments made by or on behalf of the owner or lessee, pursuant to either a contractor's sworn statement or a waiver of lien, in accordance with this act." However, since the owner did not issue the "down payment" pursuant to a sworn statement in accordance with the CLA, the Court held that the owner did not get credit for that "down payment." As a result, the owner was required to pay more than the total amount it agreed to pay for the project.
The Court's decision reiterates the importance of owners and lenders complying with the CLA in order to secure its protections. Prior to releasing "down payments" at the beginning of projects, owners and lenders should always require a sworn statement. For subcontractors or suppliers, if an owner responds to a lien claim that it has already paid the general contractor in full, the subcontractor or supplier should demand proof that all payments were made pursuant to sworn statements or waivers.
Developing construction payment procedures and navigating claims can become complex. Clark Hill's Construction Practice Group is here to help. We recommend consulting an attorney when encountering these issues. If you have any questions or would like assistance, please contact Scott Garbo at 313-965-8654, firstname.lastname@example.org@clarkhill.com
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